Stock Market Vs. Real Estate: The Right Approach For Passive Income Investors

1.jpg

For new and hopeful passive investors, most of the accessible information on the topic of the stock market versus real estate presents widely varying opinions and tends to over complicate things by assuming you have a solid education in both fields. Rather than feeling informed, this type of guidance tends to leave you in a state of confusion.

For newcomers to the debate of real estate or the stock market, I prefer to share an oversimplification of the subject to ensure you can capture the basics, providing enough information so you can start asking better questions as you embark on an investing path.

First, I am assuming that you want to grow your retirement funds in a safe investment that will produce decent returns. Second, I am assuming you are busy and don’t have the time to gain the in-depth knowledge and experience needed to actively trade or invest in the stock market or real estate and are rather looking for simple solutions.

When it comes to your retirement and the stock market, the most common passive investments are mutual funds. If you’re fortunate enough to average a 10% return on your investments and then you factor in inflation and fees, your eventual return may be lower than anticipated.

In real estate, your passive opportunities are in private lending and rental properties. Private lending commonly involves lending funds to a real estate investor or business in exchange for a set return and length of time. (Full disclosure: I am co-partner of a turnkey investment company.) Turnkey rental properties allow the investor to be as hands-off as they like. This means a turnkey company purchases, rehabs, tenants and manages the property. To truly make this a passive investment, turnkey companies do all the work for you.

Here’s what several key factors of a passive investment looks like in real estate and the stock market:

Control: With the stock market, you are at the mercy of the fund and management. With private lending, you control who you invest with, the rate of return, the length of time you want to invest and approval of the asset your money is secured by. With rental properties, you are in control of what you buy, the improvements that will increase rents and what costs are passed onto the tenants, such as landscaping and shared utility expenses.

Tangible asset: With the stock market, you lack anything tangible. With private lending and rental real estate, your funds are secured by a physical asset.

Cash flow: With the stock market, if we hit a down cycle, your profits are instantly lost. In real estate, in any economic downturn, private lenders have up to 50% equity already built in, and investors with rental properties keep netting their monthly cash flow from their tenants despite the dip.

Leverage: With the stock market, you invest your retirement savings or cash on hand. The same is true for private lending. You can leverage rental properties four-to-one, sometimes five-to-one, meaning your $50,000 investment can buy you $200,000-250,000 in real estate. In a rising market, this is a good thing and will maximize your cash on cash return.

Tax advantages: If you purchased $50,000 in stock that is now worth $200,000, you will pay taxes on that amount when you sell it. Rental properties provide opportunities for multiple tax advantages such as depreciation, deductions and a 1031 Exchange.

Appreciation: You don’t get to factor in added appreciation when investing in the stock market or private lending, but you do with a tangible asset like rental real estate. When you bring together the advantage of real estate being tangible, there’s really no comparison for the passive investor.

The math: Assuming a $50,000, 15-year investment in the passive opportunities we’ve discussed in this article:

• A mutual fund investment averaging 10% returns after fees ends up at a 7% net annualized return = Almost $138,000 after 15 years.

• Private lending investment with no fees averaging 12% net annualized return = Over $273,000 after 15 years.

• A turnkey rental property investment leveraging your $50,000 to buy $200,000 in real estate, averaging 6% in net annualized return after expenses and 3% annual appreciation of the asset = Over $431,000 after 15 years.

Whether you’re investing for your approaching retirement or beginning your passive income approach well ahead of time, passive investing is for anyone who seeks true financial peace of mind and passive income. If you had $10,000 month coming in passively, what would you be doing today? You don’t have to be an active real estate investor to achieve your goals — but you do need to find passive ways to direct some of your money into real estate.

By: Dani Lynn Robison

Advertisements

To Really Know The Midwest, Investors Need To Get Off The Bus

For those of you paying attention, the weather skipped spring this year and we in the Midwest find ourselves just tipping into warm temperatures. To keep from going crazy during those cold months, I would take the kids to a nearby pet store. This store has various and sundry kittens, puppies, and rodents that kids can manhandle while parents “shop.” Some parents browse with sincerity. More often, they pull out their phones, waiting for their kids to hit their cuddle quota, and leave without buying a thing. I’m not ashamed to say that I am one of those latter types of parents.

I thought of these pet store visits when a slew of articles about Silicon Valley VCs touring the Midwest came out a couple months ago. “Oh my god, this is so cute!”: That’s the opening quote from a New York Times piece claiming that Silicon Valley is over. In it, the author describes a bus tour for Silicon Valley VCs driving through industrial Midwest towns in Ohio and Michigan and remarking on super cute entrepreneurial assets, such as co-working spaces, and adorable cheap housing prices.

We recently hosted a group of MBAs from Stanford on a similar tour. The pet store nature of some of the stops was not lost on the group. One student remarked that a tour of Detroit, led by a local economic development group, reminded her of the staged tours of Pyongyang, where guides strictly curate what guests see and don’t see. This inspired a small group to go rogue, rent a van, and embark on a self-guided tour.

As an investor who is focused on the Midwest, I’m glad that others see the same opportunities here that we see. Real trends have motivated coastal investors to look beyond Silicon Valley, often to the Midwest, for innovative tech companies. At the same time, investors are finding it harder to make returns in the traditional tech regions as more money chases the same number of startups and the cost of building those companies (talent and rent) continues to rise. However, I have two problems with the nature of these bus tours and the narrative they create.

First, Silicon Valley doesn’t have to implode for other regions to thrive. The Midwest is home to certain massive industries that are either buying a ton of software or being eaten by it. Health care, insurance, agriculture, manufacturing, and supply chain are just a few examples. Startups and entrepreneurs closest to these industries, with the domain knowledge needed to penetrate or disrupt them, have an unfair advantage. The customers are here. The talent is here. It makes sense that the startups in these markets should be here. Investment follows opportunity to make an outsized return. This is the thesis behind Drive Capital (and why we moved here), and it holds whether or not San Francisco collapses under the weight of all those dockless scooters.

Second, the posture of these articles is one of charity, not opportunity. Worse, they invite cynicism, drawing attention away from other investors that are actually investing in Midwest startups. Just in the past few months, Redpoint led a $51 million round in one of our portfolio companies, Root, and Kleiner Perkins led a $22 million round in another one, Beam — both insurance tech companies based in Columbus. In a blog post called “Hyperbolic Headlines About Silicon Valley,” Brad Feld wrote: “Imagine the NYT article was titled ‘In a Moment of Introspection, Silicon Valley VCs Realize That There Are Tech Startups Outside of Silicon Valley.’”

Ultimately, if you see what you like at the pet store, you buy it. You feed, nurture it, and help it grow for many years. The stories that matter will be the ones that highlight the great tech companies coming out of Midwest, fueled by investors who are writing checks, not just riding buses.

Robert Hatta is the talent partner at Drive Capital, a VC fund focused on innovative companies throughout the Midwest.

  @robert_hatta

The FIX To Thrive & Prosper – Discover The Best Investment Strategies For 2018 From Top Level Financial Experts | Online Marketing Tools

In this 259 eBook! You get the knowledge as well as the exact steps to protect and grow your wealth. PLUS you get straight to the point information and the strategies for investments that are:

The Best Option to Invest In Precious Metals
The Investment That is Better Than Land
The Best Advice for New Bitcoin & Other Cryptocurrency Investors
Insights to Protect Your Most Important Assets
50 Stocks To Drop Now Before the Market Crashes
Best Alternatives To Investing In The Stock Market
Time Tested Strategies to Preserve Your Wealth when the Economy Crashes
Safe Investments During An Economic Collapse
And More!

Source: The FIX To Thrive & Prosper – Discover The Best Investment Strategies For 2018 From Top Level Financial Experts | Online Marketing Tools

Is Your Value Proposition Unique? | Content Creation, Curation, Management

We don’t call it the Unique Value Proposition for nothing. It’s got three elements: Unique Value Proposition If your value proposition is not unique, it means that you are offering the same value…

Source: Is Your Value Proposition Unique? | Content Creation, Curation, Management

Putting biases to work can be a strategy for better investment decision-making

What if we treated them as the boon of billions of years of evolution? They allow us to detect patterns from few instances, to imagine things we’ve never seen, and to function robustly in a changing environment. Can we design decision-making processes that capture the benefits of human bias without the drawbacks? Read More

via Putting biases to work can be a strategy for better investment decision-making — TechCrunch

New York’s ff Venture Capital has raised a new, $54 million fund — TechCrunch

The eight-year-old, New York-based venture firm ff Venture Capital, has raised roughly $53.8 million for its fourth seed-stage venture fund, according to an SEC filing that shows fundraising began in the fall of 2014. The firm had closed its third seed-stage fund fund in January 2014 with $52 million. Since then, ff Venture Capital has hired two new partners, including…

via New York’s ff Venture Capital has raised a new, $54 million fund — TechCrunch

The investor psychology and why VCs aren’t immune — TechCrunch

One of the most oft-repeated quotes about investing goes something like this: Be fearful when others are greedy and greedy when others are fearful. While Warren Buffett may not have had venture capital in particular in mind when he offered up that bit of sage advice, it is a fitting way to describe the current…

via The investor psychology and why VCs aren’t immune — TechCrunch